Outsourcing Madness: Choosing The Right Vendor and Avoiding Disaster

Your new company is just starting to get off the ground, and this is the first time you’ve ever had to research vendors. It’s scary. At the same time, it’s exciting. It means that you’re big enough to need to outsource work. You’re also at a disadvantage because you don’t really know what you’re doing when it comes to outsourcing. Here’s how to make sure you choose the right vendor the first time around.

Do Your Homework

It's obvious, and yet easier said than done. You need to do your homework. You've heard the "due diligence" lecture before. Here's how to actually do it: hire a company to help you dig up dirt on your vendors. Alternatively, hire an individual with experience in this area.

If you’re the DIY type, companies, like BusinessProfiles.com can help you gather some of the information you need to make an informed decision about who to go with.

You can check up on the corporate officers - were they involved in any bad business deals in the past? What about the company itself? Does it pay its bills? You were told it's a limited partnership - is it? Where is its home office located? When was it formed?

If a company is lying about one thing, it might be lying about a whole bunch of other things. While it won’t give you all of the information you need, and it’s not a concierge service, it will make doing your homework, and shifting through the pile, a lot easier.

Get Phone References

Don't just rely on a single pass with a background checking service though. Make sure you get phone references from the company. Why do this? While a company will almost never give you names of people that are unsatisfied, you can use those references to ferret out more details about the company.

For example, if you get the names of 10 different customers, you can call them all and ask about more than just how they felt about the service. Ask them specifics. Ask what work was done, when the company paid for services, how they paid, and whether there were any problems. Also ask about who they dealt with at the company.

With just a little bit of information, you can then start digging further into a company contact's professional life, where they used to work, and whether they had any problems with a previous employer. Let's say that you get 5 satisfactory reviews from company referrals. Not stellar, but satisfactory. You learn that all of those companies dealt with the same individual.

You decide to investigate that individual's previous work experience and discover that they were fired from their previous employer for misconduct - red flag. It doesn't necessarily mean you shouldn't do business with the company. It just means you need to ask more questions and be more skeptical.

Negotiate

See where there’s room for negotiation. It’s rare that a vendor cannot come down on price or offer more value-adds for a particular product or service. Often times, negotiations never happen because the buyer never asks.

It can be as simple as asking “what’s the best price you can offer me on this service?” Sometimes, a vendor’s list price is the price. Other times, it’s not. Negotiations can also be started by asking the vendor for additional service in addition to the paid service, or services that are considered customary. For example, if a business is hosting a luncheon, the business might ask for the caterer to also provide tables and seating. There may be a small upcharge for it but the overall pricing might be lower than if the business went to a separate vendor for table and chair rental.

Establish a Timeline For Services and Payment

You should have a firm timeline for when work will be completed and when you will pay. Don’t necessarily let the vendor determine the payment schedule either. You should work together to come up with a mutually agreeable timeline for work. If services are typically paid in advance, ask about scheduling payment across the project. If the vendor seems squeamish about the arrangement, tell him that this is the first time you’ve used him and you want to test the waters before handing over a lot of money up-front.

Create milestones and benchmarks that you want the vendor to meet. Then, have the vendor draw up a contract that reflects those business goals. That way, if it’s in writing, there’s no confusion about the work that’s to be done and when payment will be made.

So often, in business, payment is assumed to be handled either up-front or at the end of a transaction. The reality is that there are many times when payment is handled in billable hours format or in chunks - a third up-front, a third once a certain benchmark is completed, and the final payment upon completion of the work. That way, if the vendor doesn’t perform, you’re not out all of your money.

Steven Patterson is a experienced businessman with a penchant for innovation and efficiency. With years as a business community leader under his belt, he enjoys blogging about his insights on the job.